Twitter, Another Successful Goldman IPO

Sell-side analysts have been focused on the wrong things with Twitter, eyeballs and pageviews instead of growth and profitability. That changed today.

Another successful Goldman IPO. Goldman Sachs does a great job getting every possible dollar for a company it's taking public by dressing it up. They do a great job for the investors who are allocated IPO shares as they pop on the first day of trading. They also make a lot of money for short sellers, often less than a year after the first trade. The only people who don't benefit are the other 99.5% of America. My personal favorite of Goldman's IPOs before yesterday was A123 Systems in 2009. Priced at $13.50 a share, it closed the first day at $20.29...and closed yesterday at $0.12.

It almost seems their goal is to grow your net worth...into their net worth.

The biggest concern with Twitter(NYSE:TWTR) going public was that its best days are behind it. After last night's earnings report that seems like it could be the case. Twitter raised $1.82 billion in the IPO and the banking syndicate (their term, not mine) received 3.25%, or $59.2 million in fees. This is a hefty payday for getting the highest possible price for selling private company shares to the public.

MAUs hit a wall The trouble in the quarter stems from the slowdown in monthly active users. This is the average number of people who are active on Twitter in a given quarter and are the potential consumers of the advertisements placed on its site. This number helps gauge how fast the platform is growing but it doesn't indicate how much revenue the company will make or how profitable it will be. That said, some derivative of this metric is what professional investors used to come up with a fair price for the stock. If that's the case, this is a real problem because the growth is coming to a screeching halt:

The second line in the model above shows how many more people are on it this quarter vs last quarter. In the December quarter, 9 million more people were active than in September. The problem, however, is that this growth is slowing quickly.

Timeline views slowing causes concern but shouldn'tThere was a second metric that is also causing concern among investors but it shouldn't. The "timeline views" declined sequentially and was brought up as a concern by sell-side analysts on the call, but this shouldn't be an issue because third party software such as TweetDeck creates a scrolling headline window that keeps a person from having to refresh their screens. Its these screen refreshes that increase the number of timeline views. On the call, management said that timeline views fell because new features connecting conversations in a more seamless manner required fewer page refreshes but that data point doesn't fit well into an excel spreadsheet so it will probably be forgotten.

These two issues should have almost no impact on long-term profitability for the company since advertisers only pay when users click through to their promotions. Twitter is still the only place that consumers go to connect with sports figures and celebrities on topics that you share an interest in and it isn't going to change because of a 20% reduction in the share price. What should you do here? Keep using and enjoying the service but don't touch the stock until "the professionals" figure out a new way to value this unique company.

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I started contributing to the Motley Fool in 2013. I have held research positions at two investment banks and two hedge funds before trying more entrepreneurial ventures. I'm passionate about helping people find freedom in financial independence. Feel free to add comments and start a discussion. I hope to use these articles as forums to learn from you as well as share my opinion.
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